A ‘mystery shopping’ exercise by the mortgage market watchdog, the Financial Services Authority (FSA) has turned up significant failings relating to affordability and suitability checks by brokers.

Whilst the FSA scrutiny found no systematic fraud by brokers relating to income inflation it discovered 3 out of 41 firms who advised how clients could lie to obtain bigger home loans.

In supervisory visits the FSA found that in 47% of 249 cases reviewed the firm was unable to demonstrate that it had appropriately assessed affordability. And in 36% of cases no reason was given, or the reasoning was unclear, as to why a self-certification mortgage had been recommended.

The watchdog also found a number of small mortgage brokers are failing to keep proper records on the sale of home loans to self-employed people.

FSA managing director of retail markets, Clive Briault said: "The findings on sales and advice from brokers show significant weaknesses which are disappointing. Further work needs to be done not only on affordability and suitability checks but also on the record keeping of the advice given. But it is encouraging that we have found no evidence to suggest that salary inflation is widespread or systematic within the broker industry."

"We will be working with the firms reviewed and are publishing a summary highlighting examples of good and poor practice, designed to help intermediaries to understand and meet with our requirements."